This article was originally published in Recreate.
By: Doug Bend
These are tough times for business owners. In addition to decreased revenues, many have discovered their commercial leases do not excuse them from having to pay their full amount of rent during COVID.
Even if there is a force majeure provision that might excuse the tenant from having to perform some of its obligations, the tenant is still typically responsible for paying rent.
We sat down with Benjamin Osgood, the Founder & Managing Director of Recreate Commercial Real Estate, who contributed insights as our offices have been collaborating on how to help our clients navigate these tough waters.
We have found there are six options to consider when negotiating with your landlord:
1. Walk Away From The Lease.
You can try to negotiate the early termination of your lease, but your landlord is not likely to agree unless you pay an early termination fee and forfeit your deposit.
The early termination fee would likely cover the anticipated expense of the space being empty for a period of time until a new tenant can be found and the landlord’s unamortized lease expenses such as leasing commissions and tenant improvement construction costs.
2. Abatement of Rent.
You could also try to negotiate for your rent to be forgiven for a specified period of time until your revenues will hopefully be back up or you can more fully use the space.
That being said, many landlords are not willing to agree to rent abatement because from their perspective they still have the same amount of expenses for the space. In addition, you most likely agreed in your lease that rent would still be owed even during a pandemic.
A fallback position is to offer to agree to an extension of your lease for the same amount of time for a pause on your rent. For example, your landlord might be more willing to agree to you not paying rent for the next three or six months if your lease is extended for the same amount of time.
3. Deposit Burn Down.
Another option is to ask your landlord to apply all or a portion of your deposit to your rent, especially if you’re nearing the expiration of your lease.
Your landlord may push back because your lease most likely explicitly provides that the deposit is not intended to be used for rent.
If so, you could offer to replenish the deposit within six or twelve months should there be substantial lease term remaining.
4. Reduced Rent.
Some landlords have agreed to a reduced amount of rent based on the amount of the tenant’s reduced revenue.
Your landlord might prefer to reduce your rent for three or six months than risk you going out of business and having to find a new tenant.
5. Deferred Rent.
You are likely to have the most success negotiating deferred rent than abated or reduced rent.
For example, you could ask your landlord to not charge you rent for the next three or six months and for that amount of rent to instead be added to your rent in equal increments over the following six or twelve months.
It might be easier for you to make those catch up payments once revenues have increased when there is a widely distributed vaccine or the number of people who are infected has dramatically decreased.
6. Tenant Improvements.
Lastly, if you are negotiating a new lease you could ask for an additional tenant improvement allowance for installing high quality air filters, signage and other measures that can help reduce the risk of infection.
This could be a win/win as such measures could help decrease the potential for a successful lawsuit for negligence against both you and your landlord by an employee or a visitor.
What Perspective Does Your Landlord Have?
We have found that landlords are likely to have one of two perspectives:
(i) No Rent Change.
Some landlords are not willing to negotiate the amount of rent because their expenses have not decreased.
In addition, they believe the tenant should be required to meet its contractual obligations to continue to pay the full amount of rent.
(ii) Some Rent Or Delayed Rent Is Better Than No Rent.
Other landlords recognize that if they are not flexible the tenant might have to close down and that some rent or the delayed payment of rent is better than no rent.
You cannot control which of these perspectives your landlord might have, but by being flexible and presenting a variety of the options outlined in this article your landlord is more likely to agree that one of the solutions is fair for both parties during these uncertain times.
The information provided here is not legal advice and does not purport to be a substitute for advice of counsel on any specific matter. For legal advice, you should consult with an attorney concerning your specific situation.